Retirement Dilemma
I came across an article in the November/December 2008 issue of NEFE Digest (a publication for professional financial educators) and I could not resist sharing it. It holds many of the concepts that I have taught you in this blog. The article was written by Brent A. Neiser, CFP. He is director of Strategic Programs and Alliances and chief organizer of NEFE’s Retirement Income Decumulation Think Tank. Now, although it is being written to us as financial educators, I know you will find it useful as you look over my shoulder. Enjoy and hopefully you will get a few subtle “aha’s.”
Myths of Retirement
Ever have someone tell you that after working hard for the last 40+ years they are “finally ready to retire?” Retire on WHAT, you think. They have virtually no investments, little savings, maybe a house with limited equity, and not much else.
We in the financial education community have to explode the many myths associated with living in retirement and on social security. Astoundingly, many Americans still believe that they can somehow live their life in retirement by relying almost exclusively on that monthly government check. Social Security was designed to be a supplemental income source, not the whole retirement package.
At least 50 million families are currently “undersaved” and racing headfirst towards retirement. Many soon-to-be retirees often don’t think about (or are too overwhelmed to think about) how they are going to pay for retirement. And once they actually get there, they realize they have not adequately calculated the cost of living through retirement. Alarmingly, they often overestimate how long their personal savings will last once they retire and begin spending their limited nest egg.
Too many people think of 65 (or even earlier) as the so-called “magic number” when they will stop working. Quite possible they spent their life working at a job they didn’t like, but it paid the bills. Even worse? A life spent at a job they didn’t like that didn’t pay the bills.
But absent significant health issues, there is no particular reason to retire at 65. All of us have significantly more years beyond that arbitrary date in which we can have vibrant, intellectually stimulating, and challenging lives. Regardless, many stop working, more than likely too early. Doing that and claiming Social Security before full retirement age will reduce lifetime inflation-adjusted earnings by up to a third.
So, how do we motivate people to work longer and save more? It is not an easy sell. Since the 1950s, when the retirement age was roughly 68, we’ve been marching steadily towards a younger retirement age. Right now, it is about 63 according to the Bureau of Labor Statistics.
But working longer and planning too far into the future is counterintuitive to most of us. We’ve been the target of a lifetime of advertising telling us that if you want it, buy it now on credit and worry about tomorrow- tomorrow.
Regardless, of whether someone is in their forties, fifties, or beyond, we as financial educators need to affirm that building up large retirement savings is not a luxury but a necessity. Soon-to-be retirees need to understand not only to save for the “fun” part of retirement, but also for the unavoidable. Medicare co-pays will sap their accumulated savings as they grow older. Inflation will not stop just because they have gone into retirement. As they age, just about everything will cost more, even as they draw down their accumulated savings and investments.
There are some solutions. By retiring later, people can avoid drawing down what little savings they have accumulated and actually can continue to add to their savings. In many cases, they’ll also be able to keep their employer sponsored health insurance.
An added bonus of working past 65: more time to pay off any high-interest outstanding debts, like credit cards, car loans, or personal lines of credit. The goal is to go into retirement debt-free or close to it.
As professionals, it is imperative we provide more education and retirement product options for those in or nearing the retirement phase of their life. Obviously, we also must provide comparable direction and assistance for those in the savings and accumulation phase.
In particular, we must get soon-to-be retirees to talk about annuitizing at least a part of a lump sum distribution from an IRA or 401(k) to provide a stable, secure, and predictable income. But, would-be buyers need to know to shop around and ask lots of questions, because fees and surrender provisions vary significantly.
We need to motivate people to seek out professional investment advice regardless of their current income and how little investment income they may have accumulated. A few hours and a few hundred dollars’ worth of professional advice can make a significant difference in the long run to someone with even limited savings.
As much as anything else, we need to help people understand that retirement is a goal that you can ease into, not an event that has to take place at a specific, pre-determined age. Individuals can go on “retiring” for decades. Retirement, as we see it now, undoubtedly will look different in 10 or 20 years time.